Progressive Gaming International (PGIC)

Income
taxes. For the nine months ended September 30, 2008, we
recognized a net tax benefit of $0.5 million related to our foreign
operations. For the nine months ended September 30, 2007, we did not
recognize a tax benefit or provision due to our net operating loss
position.

Discontinued
operations, net of taxes. For the nine months ended September
30, 2008, we recorded residual charges totaling $1.6 million related to the
disposed slot and table operations. These residual charges represent
additional provisions for doubtful receivables of the disposed units, and
additional accruals for table-games related royalties, settlements and legal
fees. During the nine months ended September 30, 2007, discontinued
operations charges totaled $65.6 million, including a $38.3 million loss on
disposal, net of tax, a $24.7 million charge related to the Webb vs. Mikohn
legal settlement, and loss from operations of the discontinued segment of $2.6
million.

Income
taxes. For the six months ended June 30, 2008, we recognized a
net tax benefit of $0.5 million related to our foreign
operations. For the six months ended June 30, 2007, we did not
recognize a tax benefit or provision due to our net operating loss
position.

Discontinued
operations, net of taxes. For the six months ended June 30,
2008, we recorded residual charges totaling $1.6 million related to the disposed
slot and table operations. These residual charges represent
additional provisions for doubtful receivables of the disposed units, additional
accruals for table-games related royalties, settlements and legal
fees. During the six months ended June 30, 2007, we recorded charges
totaling $30.6 million representing impairment charges associated adjusting
to fair market value the carrying values of the disposed slot and table
assets, including $2.7 million in restructuring charges and $1 million in
transaction costs associated with the disposal of the slot and table
operations. Revenues for the slot and table operations of $3.9
million for the six months ended June 30, 2007 were also included in
discontinued operations.

Income
taxes. For the quarter ended March 31, 2008, we recognized a
tax benefit of $0.5 million related to our foreign operations. For
the quarter ended March 31, 2007, we did not recognize a tax benefit or
provision due to our net operating loss position.

Discontinued
operations. Discontinued operations includes the earnings and
losses of the slot and table games operations, which were disposed of during the
second half of 2007. For the quarter ended March 31, 2008, we recorded charges
totaling $1.4 million, representing additional provisions for doubtful
receivables of the former slot and table games operations, additional accruals
for table-games related royalties, and legal fees. The loss
from discontinued operations of $1.3 million for the quarter ended March 31,
2007 represented operating losses of the slot and table games segment prior to
disposal. All earnings and losses of discontinued operations are presented net
of taxes.

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Effective
January 1, 2007, we adopted Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 contains a two-step approach to recognizing
and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than
50% likely of being realized upon settlement.

Although we believe we have adequately reserved for our uncertain tax positions, no
assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that
the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of
reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.

Income Taxes

FACE="Times New Roman" SIZE="2">We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. EffectiveJanuary 1, 2007, we adopted Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 contains a two-step approach to recognizingand measuring uncertain tax positions accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidenceindicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than50% likely of being realized upon settlement.

Although we believe we have adequately reserved for our uncertain tax positions, noassurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent thatthe final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact ofreserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.

Stock-Based Compensation

Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment (SFAS No. 123(R)) whichestablishes standards for accounting for transactions in which a company exchanges its equity instruments for goods and services or incurs a liability in exchange for goods and services that is based on the fair value of the entitys equityinstruments or that may be settled by the issuance of those equity instruments. The primary focus of this pronouncement is on issuing share-based payments for services provided by employees. This pronouncement also requires recognition ofcompensation expense for new equity instruments awarded or for modifications, cancellations or repurchases of existing awards starting January 1, 2006. Compensation expense for new equity awards, in most cases, will be based on the fair valueof the stock on the date of grant and will be recognized over the vesting service period. An award of a liability instrument, as defined by this pronouncement, will initially be recorded at fair value and will be adjusted each reporting period tothe new fair value through the date of settlement. Additionally, we have adopted the guidance in SAB 107, Share-Based Payment, which provides interpretive guidance on SFAS No. 123(R) valuation methods, assumptions used in valuationmodels, and the interaction of SFAS No. 123(R) with existing SEC guidance. SAB 107 also requires the classification of stock compensation expense to the same financial statement line item as cash compensation, and therefore, may impact cost ofsales and service, related gross profits and margins, selling, general and administrative expenses and research and development expenses.

SIZE="2">We elected the modified prospective application method contained in SFAS No. 123(R) to account for share-based payments. Prior to the adoption of SFAS No. 123(R), we accounted for share-based payments under the recognition andmeasurement provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related Interpretations, as permitted by SFAS No. 123,Accounting for Stock-Based Compensation. Under APB No. 25, no compensation cost was required to be recognized for options granted that had an exercise price equal to the market value of the underlying common stock on the date of grant.

The principal effects of adopting SFAS No. 123(R) are:

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The fair value of unvested outstanding options at the beginning of first quarter 2006 will be expensed over the remaining service period.

Forfeitures over the expected term of the award are estimated at the date of grant and the estimates adjusted to reflect actual subsequent forfeitures. Previously,we had reflected forfeitures as they occurred. The effect of this change was not significant.

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Any tax benefits recognized as a result of the exercise of employee stock options would be classified as a financing cash flow. We have not recognized any taxbenefits related to stock-based compensation cost as a result of the full valuation allowance on its net deferred tax assets and its net operating loss carryforwards.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Adoption of this pronouncement did not change the methodology we use to determine the fair value of our share-based compensation arrangements. We use theBlack-Scholes-Merton option-pricing model for stock options and the grant date fair value of our common stock for restricted stock awards.